All eyes may currently be on the imminent congressional debate which will address whether the country should seal a deal with holdout funds, potentially opening the door to the issuing of dollar-denominated debt to prop up the country’s finances. But in the background, another debt has been steadily growing in the meantime: that of the Central Bank.

The monetary authority has issued a massive amount of peso-denominated Lebac notes in exchange for circulating pesos, in a bid to reduce the amount of currency being spent on goods and thus limit price hikes. That has led local currency debt to rise by 72 percent since President Mauricio Macri took office.

The amount of Lebac notes issued grew from 265 billion on December 10, when the handover of power from Cristina Fernández de Kirchner took place, to 474 billion last Wednesday, the last day for which figures are available.

With the Central Bank also raising interest rates sharply last Tuesday for its latest Lebac auction, that debt could be set to grow even more, as buying those notes becomes more profitable for banks.

The upside of the move is that the more notes banks buy, the more pesos they give back to the Central Bank, reducing the amount in circulation and thus easing inflationary pressures. But some financial agents in Buenos Aires City are worried the situation could end up spiralling out of control when those debts — plus interest rates — have to be repaid.

Speaking to the Herald, former Central Bank chief Aldo Pignanelli, who currently works as an economic adviser to Renewal Front leader Sergio Massa, said the situation looked gloomy.

“Inflation is skyrocketing and the answer is to issue Lebac notes to try to stop it. The debt figures are really worrying, and the same is true for the 37 percent interest rates they offered last week,” he said.

Others are not as critical.

According to Economía & Regiones’ Diego Giacomini, that debt has helped neutralize roughly 200 billion pesos too, and given the government time to get other underlying problems in check in its bid to curb long-term inflation.

“There was an excess of pesos that amounted to four percent of Gross Domestic Product (GDP). That was taken care of in just 70 days, mostly through Central Bank notes,” Giacomini told the Herald.

Circulating pesos are now growing at a pace of 25 percent per year according to February’s figures, significantly below the 40 percent seen in the last month of Fernàndez de Kirchhner’s administration. The 25 percent figure is below current inflation rates, so it could help bring down inflation in the long term if it remains at those levels or less.

Repaying debt

But the notes that are issued to reduce circulating pesos have to be repaid.

That means that the Central Bank needs to auction large amounts of new notes almost every week, as previous issuings mature rapidly, or else face more inflationary pressure.

Finance Minister Alfonso Prat-Gay had promised to start slowing down price hikes this year, with an inflation target of 20 to 25 percent for 2016. But so far the promise looks far-fetched, with prices way above that range in the beginning of the year (see page 7).

Hitting the target

Economists consulted by the Herald said the government has other alternative paths if it wants to keep that promise.

One of them is improving tax collection or reducing state spending, forcing it to print less money. But the government also wants to keep its promise of reducing taxes, and cutting subsidies further could be met with resistance.

Another option is trying to keep the dollar relatively cheap, considering the effect it has on business owners price setting decisions. That could be achieved by selling Central Bank’s foreign currency reserves, but it would lead to complaints from exporters and possibly more conflicts over grain sales.

With those options out of the table, Prat Gay is betting on the deal it has sealed in New York for relief.

He wants to use it to return to international markets to get dollar-denominated, long-term debt. That, in his view, will help balance the country’s finances without resorting to bigger cuts and perhaps allowing for more tax cuts. Eventually, economic growth would help pay the bills, the government believes.

But Pignanelli remains unconvinced.

“If we bet on bringing in dollars we could end up having an uncompetitive exchange rate. Debt also comes at a cost, especially with the high rates we are currently paying,” he argues.

He also believes the government should have been tougher against the financial speculators who bought cheap “dollar futures” contracts back in 2015, which are forcing the Central Bank to print much more pesos this year.

“It is very frustrating to see the past repeating itself. We have the son of Sturzenegger, the son of Llach, the son of Liendo, all at the Central Bank. We are just lacking a Cavallo junior,” Pignanelli said referring to former public officers who were part of the government during the convertibility years of the 1990s, which ended with a debt crisis.